United States: Pension-Related Reduction In Redundancy Compensation Provided By A Social Plan: Discrimination On Grounds Of Disability But No Age Discrimination

Pursuant to a decision of the European Court of Justice ("ECJ") in a preliminary ruling upon reference of the labor court Munich (Odar vs. Baxter, ref. C-152/11, decision of 6 December 2012), a formula in a social plan which reduces the redundancy pay for employees who are close to qualifying for statutory retirement pensions, including early pensions with reductions, does not constitute age discrimination. However, such formula may constitute a discrimination based on disability in violation of the provisions of the Equal Treatment Framework Directive (2000/78/EC).

Note that a reference for a preliminary ruling allows the courts of the Member States to refer questions to the ECJ about the interpretation of European Union law or the validity of a European Union act. The ECJ does not decide the dispute itself. It is for the national court to dispose of the case in accordance with the ECJ's decision, which is similarly binding on other national courts before which a similar issue is raised.

Introduction. The EU Directive 2000/78 on equal treatment in employment was transposed into German law by the General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz–"AGG"). Pursuant to the AGG, redundancy compensation plans (so-called "social plan") can provide for different amounts of compensation payments if the compensation scheme is graduated according to age or length of service. The AGG further allows that the social plan excludes from the benefits it provides employees who are deemed as financially secure because they are entitled to a statutory pension, even though they have been receiving unemployment benefits prior to that.

Case. Baxter Deutschland GmbH ("Baxter") entered into a social plan with its works council, providing for compensation payments for employees suffering from a redundancy. The compensation was calculated according to a standard formula, taking into account the employees' length of service and age.

For employees older than 54 years old, an alternative calculation applied which did not take into account their length of service, but on the contrary, took into account the number of months which existed before being able to receive, at the earliest possible time, any kind of pension income whatever its amount.

The definition also covered any reduced pension income due to an early beginning of retirement (i.e., early retirement due to disability). In the present case, the employee, Mr. Odar, was 58 years old and recognized as being severely disabled. He had been employed for almost 30 years with Baxter when Baxter terminated his employment relationship. Under the German retirement pension scheme, Mr. Odar would have received an ordinary old-age pension at the age of age 65 but, being severely disabled, could claim an early retirement pension at the age of 60 which would be of a reduced amount. Pursuant to the special calculation formula from the social plan, Baxter paid to Mr. Odar a reduced compensation (as Mr. Odar was older than 54 years and could benefit from a early reduced pension income due to disability). Mr. Odar brought an action before the labor court of Munich requesting that Baxter be ordered to pay him additional compensation equal to €272,000, corresponding to the difference between the compensation he effectively received and the amount of compensation he would have received had he been not older than 54 years of age and the standard formula had been applied to him. He argued that the reduced compensation provided in the social plan was, in fact, discriminating on grounds of age and disability.

Decision of the ECJ. The Baxter social plan provides for a calculation method taking into account the employees' age. Such difference in treatment on the basis of age is justified pursuant to Directive 2000/78. Indeed, since older employees mandatorily receive a statutory retirement pension as of age 65, the social partners can rightfully decide to reduce in the social plans they negotiate the redundancy compensation payment for them.

However, the ECJ holds that the prohibition of discrimination on grounds of disability precludes the implementation of the social plan's provisions which take into account the possibility of receiving an early retirement pension on grounds of disability (alternative special calculation formula). Pursuant to the Baxter social plan, severely disabled employees are paid a redundancy compensation which is lower than the amount paid to a nondisabled employee of the same age. This difference of treatment cannot be justified as it constitutes a discrimination based on disability.

Comment. The reduction of redundancy compensation for employees close to old-age retirement does not constitute age discrimination. In that aspect, the ECJ follows the German Federal Labor Court, which has always accepted such difference in treatment. It is justified by the objective to grant compensation to former employees for the future, whilst taking into account the need to achieve a fair distribution of the company's limited financial resources in the context of a social plan. Moreover, the aim of preventing persons who are not seeking new employment, but who will receive a replacement income in the form of a retirement pension, from claiming a compensation upon termination must be considered as legitimate. However, the ECJ considers that a further reduction of redundancy compensation for employees eligible for early retirement due to disability constitutes a discrimination based on disability. Indeed, these rules have an excessive adverse effect on the legitimate interests of severely disabled employees and on the social policy objectives pursued by such early compensation. In the future, the social partners negotiating a social plan will have to exclude the parameter "early retirement pension" from alternative calculation formulas for redundancy compensation, to prevent discrimination due to disability. In addition, they will also have to exclude the employees' gender or face the possibility of being considered to discriminate due to gender.

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